• Earnings recovery is in sight. Footfalls are gradually returning to the malls while the gradual easing of restrictions following the roll-out of Covid-19 vaccine should spur recovery in the economy
• Taking a longer-term outlook on earnings, we believe it is a good time to collect solid assets at a lower price
• Maintain OVERWEIGHT on MREITs as average sector yield of 5.4% is still more favourable than the current MGS yield of 3.45%

Recovery Coming Along as Expected

Malaysia began the rollout of Covid-19 vaccine in Feb-2021 and distribution is on schedule. Meanwhile, Covid-19 infection cases have also gradually dropped from the high in early February. As such, restrictions have been eased and Malaysians are now allowed to travel within the district while inter-state travels are still strictly monitored to prevent another wave of the pandemic. This gradual easing of restrictions is in-line with our expectations and should promote an earnings recovery in the MREITs. The retail REITs will be the first to recover while hospitality REIT’s earnings are still closely related to the easing of inter-state travel and international travel. Elsewhere, other asset segments should be relatively stable.

Taking a Longer Perspective on MREIT’s Earnings Outlook

Looking past 2021, we believe earnings would improve as we expect the economy to normalise post the pandemic. Retail malls are expected to no longer be burdened by rental assistance extended to tenants while pent-up demand for shopping would spur earnings. Hotel occupancy should also improve moving forward as travel bubbles come to fruition as countries move further along with their respective vaccination programmes. Offices, while stable for now, may see some decrease in rental space occupancy and a cap in rental reversions should the hybrid working model gain traction in the long run. Nonetheless, we still expect stability in this segment in the short- to medium-term horizon. Elsewhere, industrial and other asset segments should remain stable in terms of occupancy and rental.

Sector vs MGS yield spread is still above mean despite rising MGS yields

The 10-year MGS (Malaysian Government Securities) yield rose sharply in ytd- 2021, from 2.68% as at end Dec-2020 to 3.45% as at 19 March 2021. The increase in the 10-year MGS yield is largely attributable to the spike in the US Treasury yields, which triggered a rout in global bond markets. We are not overly concerned on the impact of rising MGS yields to the MREITs valuation, as the current yield spread of 125 bps is still above the 5-year historical mean of 1.02%, and our analysis shows that the statistical correlation between MGS and MREIT prices has weakened in the recent quarters. At 5.4% 2022E yield, MREITs look attractive vis- à-vis fixed deposit savings and MGS. Elsewhere, OPR has remained steady at 1.75% and we expect OPR to remain at this level throughout 2021.

Maintain OVERWEIGHT

We maintain OVERWEIGHT on the MREITs as we continue to see strong investor appetite for high-quality yield assets due to the low interest rates policy despite the rising MGS yield environment. Elsewhere, we believe an earnings recovery in the MREITs is on the horizon given the distribution of vaccines and as the economy starts to heal. The low share-price environment is also a good opportunity for investors to accumulate quality REITs with solid assets.

Source: Affin Hwang Research - 29 Mar 2021